Obama's First 100 Days Analysis (2009)

Presented by Malcolm Robinson

I was an optimist once – about 10 years ago – and I will be an optimist again some time in the future.

Let’s start with the most recent jobs numbers. The labor department says that 669,000 initial claims for unemployment insurance were filed last week (seasonally adjusted data). The number of workers claiming benefits for more than 1 week rose 161,000 to 5.73 million. This is suggestive of the fact that unemployed workers are having difficulty finding jobs. This morning, the Bureau of Labor Statistics announced that It estimated that the US economy shed another net 663,000 jobs in March (some lose, some gain jobs). The numbers for January were revised to a job loss of 741,000 from an earlier report of 655,000. Total job losses since the recession began in 2007: 4 number 5.1 million. The headline U3 unemployment rate rose from 8.1 to 8.5%. The more inclusive U6 rate (marginally attached, part time want full time) is close to 16%. April is likely to be another bad month as layoffs announced in March begin to take place. The number of long term unemployed rose to 3.2 million (27 weeks or more) and has risen by 1.9 million since the recession began again suggesting how difficulty it is for job losers to find jobs.

I would not be surprised if the rate of contraction slows this year (with the help of the Administration’s stimulus) (things would be much worse without it…) but that the economy’s growth next year will be almost flat – less than 1%. It may still feel like a recession even if the recession is technically over. The Fed sees unemployment topping out at 8.8%; it’s very likely we’ll see unemployment rates of 9.5 or maybe 10% next year.

Let’s use a simple accounting identity to try to grasp what is occurring in the United States.

Consumption by households is falling, falling faster than previously estimated and is falling faster than GDP is. Consumption is falling because people are losing jobs and losing income and consumption is falling because households have seen a dramatic decline in wealth spurring individuals to save more and consume less to make up for their portfolio losses.

Investment is falling. New home construction and non-residential construction are both falling at the same time. Firms that want to expand find it difficult to do so given the credit crunch we described last fall. Our exports to the rest of the world are falling because the rest of the world’s economies are contracting. It is true we are importing less from the rest of the world – our economy is contracting and we require less oil.

How has the government responded? As you can see, the only sector left to prop up the economy is the government. The government needs to run extra large deficits. It is not clear to me that any action the government has undertaken in its first 100 days is large enough to turn the economy around.

We do know that spending boosts employment and, with it, unemployment. The Reagan tax cuts of 1981 boosted consumption; the drive to lay coaxial cable in the 1990’s boosted investment. As Prof. McNutt intuitively knows, government spending is spending like any other spending – in a demand driven, non-supply constrained world. Why not rely on tax cuts?

The key reason here is the need for households to save in response to declines in household wealth. As I argued to anyone who would listen (mostly my poor students but also to Cincinnati Gentleman Magazine), the 2008 tax cuts failed to stimulate spending; they were temporary in nature and people either used their check to add to their savings or to pay down their debt.

The Administration’s stimulus package has too much in the way of tax cuts and not enough in the way of spending. I understand that this may have been the best that could be accomplished due to the need to have a filibuster proof majority, but it still leaves me thinking that the package delivers too little bang for the buck. The package does provide for increased unemployment payouts and transfers to the states that will allow them to maintain public employment but not expand it. There is a substantial increase in infrastructure spending and investments to create the right environment for future economic growth – but these projects are timed for 2010 or later which will help in the future, but not in the here and now.

What do we know about large government spending in the US during the 30’s and 40’s? New Deal policies employed Americans on a vast scale (only someone who has never been unemployed could claim that having a government related job and having a job shouldn’t count as employment). The unemployment rate fell from 25% to below 10% from 1933 to 1936. President Roosevelt tried to balance the budget in 1937, and unemployment rose; the New Deal began anew and unemployment was brought down to about 10% before the war. What we know today is that New Deal budgets weren’t stimulative enough to create true national prosperity (work of E. Cary Browne on budgets vs. full employment budgets). It was the war, and only the war that created a middle class and reduced unemployment to pre-Depression rates. By 1945, the unemployment rate in the US was 1.9%. Throughout the 50’s, unemployment hovered between 5 and 6%.

We can’t understand government policy in a vacuum; macroeconomics teaches us that fiscal policy can only be understood in a context of the accompanying monetary policy. The Fed has been purchasing large quantity of government bonds in the hope of driving up their price (lowering their return). This is what we now know as “quantitative easing” – so that banks will shift their demand from cheap, safe government bonds to mortgages or corporate bonds. This should help businesses that are strapped for cash and potential home buyers. Businesses that want to expand and hire workers should now be able to given a more liquid capita market.

(I’ll leave to George the discussion of financial markets. Let me suggest that the Geitner plan, even if it “works” appears to be too small – maybe ½ the size of what it needs to be.)

And then we must wonder how all of this gets wound down. The monetary base is growing at a rate of about 10 to 12%. If the Obama administrations fiscal policies remain intact, CBO estimate we will have a debt/GDP of 82%. The one good news is that as the world has rushed to buy US government short term debt, interest payments are very low interest payment ratio low; at the moment, as our CFO surely agrees, this is a good time to finance borrowing!